RMCF 10-Q Quarter ended Nov. 30, 2015

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		Three Months Ended November 30,								Nine Months Ended November 30,
		2015				2014				2015				2014
Revenues
Sales		$	8,024,803			$	8,583,981			$	22,480,092			$	23,108,761
Franchise and royalty fees			1,782,510				1,977,581				6,965,797				7,232,455
Total revenues			9,807,313				10,561,562				29,445,889				30,341,216
Costs and Expenses
Cost of sales, exclusive of depreciation and amortization expense of $98,009, $102,179, $300,731 and $292,632, respectively			5,202,953				5,527,876				14,448,327				14,229,018
Franchise costs			657,660				558,560				1,871,113				1,623,505
Sales and marketing			593,793				608,536				1,832,828				1,838,395
General and administrative			1,087,633				1,230,495				3,550,781				3,816,996
Retail operating			669,961				724,608				2,318,404				2,697,163
Depreciation and amortization			343,548				357,865				1,064,211				1,097,404
Restructuring and acquisition related charges			-				-				-				709,212
Total costs and expenses			8,555,548				9,007,940				25,085,664				26,011,693
Income from Operations			1,251,765				1,553,622				4,360,225				4,329,523
Other Income (Expense)
Interest expense			(52,553	)			(60,666	)			(167,424	)			(183,333	)
Interest income			13,779				16,208				40,814				43,274
Other Income (Expense), net			(38,774	)			(44,458	)			(126,610	)			(140,059	)
Income Before Income Taxes			1,212,991				1,509,164				4,233,615				4,189,464
Income Tax Provision			439,355				554,500				1,286,400				1,368,165
Consolidated Net Income		$	773,636			$	954,664			$	2,947,215			$	2,821,299
Less: Net income (loss) attributable to non-controlling interest			332,835				(7,714	)			963,659				270,231
Net Income attributable to RMCF		$	440,801			$	962,378			$	1,983,556			$	2,551,068
Basic Earnings per Common Share		$	.08			$	.16			$	.34			$	.41
Diluted Earnings per Common Share		$	.07			$	.15			$	.32			$	.40
Weighted Average Common Shares Outstanding - Basic			5,840,407				6,162,829				5,911,561				6,171,327
Dilutive Effect of Stock Options and Restricted Stock Units			181,742				218,027				209,173				265,153
Weighted Average Common Shares Outstanding - Diluted			6,022,149				6,380,856				6,120,734				6,436,480

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		November 30,				February 28,
		2015				2015
		(unaudited)
Assets
Current Assets
Cash and cash equivalents		$	5,153,920			$	7,157,371
Accounts receivable, less allowance for doubtful accounts of $825,118 and $696,798, respectively			4,107,459				4,291,470
Notes receivable, current portion, less current portion of the valuation allowance of $2,262 and $3,762, respectively			336,093				359,493
Refundable income taxes			4,436				172,945
Inventories, less reserve for slow moving inventory of $205,967 and $197,658, respectively			5,071,320				4,785,376
Deferred income taxes			515,303				572,957
Other			320,872				318,275
Total current assets			15,509,403				17,657,887
Property and Equipment, Net			6,564,819				6,797,536
Other Assets
Notes receivable, less current portion and valuation allowance of $30,000 and $28,500, respectively			669,075				668,302
Goodwill, net			2,977,473				2,977,473
Franchise Rights, net			5,238,513				5,439,460
Intangible assets, net			424,599				440,428
Other			149,890				157,127
Total other assets			9,459,550				9,682,790
Total A ssets		$	31,533,772			$	34,138,213
Liabilities and Stockholders’ Equity
Current Liabilities
Current maturities of long term debt		$	1,242,066			$	1,208,888
Accounts payable			1,851,747				1,675,746
Accrued salaries and wages			734,954				819,184
Other accrued expenses			3,006,376				2,910,777
Dividend payable			700,728				721,536
Deferred income			604,238				951,241
Total current liabilities			8,140,109				8,287,372
Long - Term Debt, Less Current Maturities			4,148,741				5,083,479
Deferred Income Taxes			1,071,961				1,029,507
Commitments and Contingencies
Stockholders’ Equity
Preferred stock, $.001 par value per share; 250,000 authorized; -0- shares issued and outstanding
Series A Junior Participating Preferred Stock, authorized 50,000 shares			-				-
Undesignated series, authorized 200,000 shares			-				-
Common stock, $.03 par value per share, 100,000,000 shares authorized, 0 and 6,012,799 issued and outstanding, respectively			-				180,384
Common stock, $.001 par value per share, 46,000,000 shares authorized, 6,018,198 and 0 issued, and 5,839,396 and 0 outstanding, respectively			6,018				-
Additional paid-in capital			7,225,711				7,163,092
Retained earnings			11,391,255				11,524,708
Non-controlling interest in equity of subsidiary			1,894,025				869,671
Treasury stock, 178,802 shares and 0 shares, at cost			(2,344,048	)			-
Total stockholders’ equity			18,172,961				19,737,855
Total liabilities and stockholders’ equity		$	31,533,772			$	34,138,213

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		Nine Months Ended
		November 30,
		2015				2014
Cash Flows From Operating activities
Net income		$	2,947,215			$	2,821,299
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,064,211				1,097,404
Provision for slow moving inventory			68,175				33,251
Asset impairment and store closure losses			-				178,000
Provision for loss on accounts and notes receivable			129,000				192,137
Loss (gain) on sale or disposal of property and equipment			90,149				(6,524	)
Expense recorded for stock compensation			615,740				700,526
Deferred income			(430,043	)			(491,115	)
Deferred income taxes			100,108				(250,075	)
Changes in operating assets and liabilities:
Accounts receivable			50,028				307,530
Inventories			121,220				(208,403	)
Other current assets			(9,182	)			23,649
Accounts payable			(321,489	)			(190,245	)
Accrued liabilities			179,878				278,639
Net cash provided by operating activities			4,605,010				4,486,073
Cash Flows From Investing Activities
Addition to notes receivable			(46,489	)			(163,396	)
Proceeds received on notes receivable			259,619				383,208
Purchase of intangible assets			(54,479	)			-
Proceeds from sale of assets			23,692				531,345
Purchases of property and equipment			(625,180	)			(446,166	)
Decrease (increase) in other assets			(115,407	)			(8,786	)
Net cash used in investing activities			(558,244	)			296,205
Cash Flows From Financing Activities
Payments on long-term debt			(901,560	)			-
Repurchase of common stock			(3,030,708	)			(1,904,829	)
Issuance of common stock			-				69,599
Proceeds from issuance of common stock in subsidiary			-				892,895
Tax benefit of stock awards			19,868				200,544
Dividends paid			(2,137,817	)			(2,039,911	)
Net cash used in financing activities			(6,050,217	)			(2,781,702	)
Net Increase (Decrease) in Cash and Cash Equivalents			(2,003,451	)			2,000,576
Cash and Cash Equivalents, Beginning of Period			7,157,371				5,859,729
Cash and Cash Equivalents, End of Period		$	5,153,920			$	7,860,305

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NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

The accompanying consolidated financial statements include the accounts of Rocky Mountain Chocolate Factory, Inc., a Delaware corporation, its wholly-owned subsidiaries, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation (“RMCF”), Aspen Leaf Yogurt, LLC (“ALY”), and its 39%-owned subsidiary, U-Swirl, Inc. (“U-Swirl”), of which RMCF has financial and operational control (collectively, the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

The Company is an international franchisor, confectionery manufacturer and retail operator in the United States, Canada, Japan, South Korea and the United Arab Emirates. Founded in 1981, the Company is headquartered in Durango, Colorado and manufactures an extensive line of premium chocolate candies and other confectionery products. U-Swirl franchises and operates soft-serve frozen yogurt stores. The Company also sells its candy in selected locations outside of its system of retail stores and licenses the use of its brand with certain consumer products.

Effective March 1, 2015, the Company was reorganized to create a holding company structure. The operating subsidiary with the same name, Rocky Mountain Chocolate Factory, Inc., a Colorado corporation, which was previously the public company, became a wholly-owned subsidiary of a newly formed entity, Rocky Mountain Chocolate Factory, Inc., a Delaware corporation (“Newco”), and all of the outstanding shares of common stock of RMCF, par value $0.03 per share, were exchanged on a one-for-one basis for shares of common stock, par value $0.001 per share, of Newco. The new holding company began trading on March 2, 2015 on the NASDAQ Global Market under the symbol “RMCF”, which was the same symbol used by RMCF prior to the holding company reorganization.

In January 2013, through the Company’s wholly-owned subsidiaries, including ALY, the Company entered into two agreements to sell all of the assets of its ALY frozen yogurt stores, along with its interest in the self-serve frozen yogurt franchises and retail units branded as “Yogurtini” which the Company also acquired in January 2013, to U-Swirl, a publicly traded company (OTCQB: SWRL), in exchange for a 60% controlling equity interest in U-Swirl. Upon completion of these transactions, RMCF ceased to directly operate any Company-owned ALY locations or sell and support frozen yogurt franchise locations, which is now being supported by U-Swirl. As of November 30, 2015, the Company held approximately 39% of U-Swirl’s outstanding common stock. Additionally, the Company has the right to acquire approximately 29,290,700 shares of U-Swirl’s common stock as of November 30, 2015 through the conversion of outstanding debt owed by U-Swirl to the Company (see discussion of the U-Swirl Loan Agreement below). If the Company exercised this conversion right, the Company would hold approximately 74% of U-Swirl’s common stock. The U-Swirl Board of Directors is composed solely of Board members also serving on the Company’s Board of Directors.

In fiscal year 2014, the Company entered into a promissory note with a third-party lender, and in turn, the Company entered into a loan and security agreement with U-Swirl (the “U-Swirl Loan Agreement”) pursuant to which U-Swirl could borrow up to $7.75 million from the Company to fund acquisitions . Borrowings under the U-Swirl Loan Agreement are payable in cash or conversion of the obligations into capital stock of U-Swirl, or a combination thereof, at the discretion of the Company. The U-Swirl Loan Agreement is secured by all of the assets of U-Swirl and its subsidiaries. U-Swirl is subject to various financial and leverage covenants under the U-Swirl Loan Agreement. U-Swirl was not compliant with the covenants at November 30, 2015. The loan covenants require U-Swirl to maintain consolidated adjusted EBITDA of $1,804,000 for the twelve months ended November 30, 2015. At November 30, 2015, U-Swirl reported $1,318,000 of adjusted EBITDA. Pursuant to the U-Swirl Loan Agreement, upon the occurrence and continuance of an event of default, among other remedies, the Company may charge interest on all amounts due under the loan at the default rate of 15% per annum, accelerate payment of all amounts due under the loan, foreclose on its security interest, and/or convert any amounts due under the loan to capital stock of U-Swirl at a premium. At November 30, 2015 we believe that the conversion of the loan into preferred stock as settlement of the obligation would result in 63% more preferred shares issued when compared to the amount issuable if U-Swirl was compliant with the loan covenants.

In fiscal year 2014, U-Swirl acquired the franchise rights of frozen yogurt stores branded as “CherryBerry”, “Yogli Mogli Frozen Yogurt” and “Fuzzy Peach Frozen Yogurt”, and U-Swirl currently operates and franchises self-serve frozen yogurt cafés under the names “U-Swirl,” “Yogurtini,” “CherryBerry,” “Josie’s Frozen Yogurt,” “Yogli Mogli Frozen Yogurt,” “Fuzzy Peach Frozen Yogurt,” “Let’s Yo!,” and “Aspen Leaf Yogurt”.

The Company’s revenues are currently derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees, royalty and marketing fees from franchisees’ sales; and sales at Company-owned stores of chocolates, frozen yogurt, and other confectionery products.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the number of stores operated by the Company, its franchisees and licensees at November 30, 2015:

*U-Swirl cafés and the brands franchised by U-Swirl have historically utilized a development area sales model. The result is that many areas are under development, and the rights to open cafés within the development areas have been established, but there is no assurance that any individual development area will result in a determinable number of café openings.

Basis of Presentation

The accompanying consolidated financial statements have been prepared by the Company, without audit, and reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Certain amounts previously presented for prior periods have been reclassified to conform to the current presentation. The reclassifications had no effect on net income, working capital or equity previously reported. In the opinion of management, the consolidated financial statements reflect all adjustments (of a normal and recurring nature) which are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. The results of operations for the nine months ended November 30, 2015 are not necessarily indicative of the results to be expected for the entire fiscal year.

These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2015.

Subsequent Events

On January 5, 2015 U-Swirl, Inc filed Form 15, Certification and Notice of Termination of Registration Under Section 12(g) of the Securities Exchange Act of 1934 or Suspension of Duty to File Reports Under Sections 13 and 15(d) of the Securities Act of 1934.

New Accounting Pronouncements

In January 2016, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

In November 2015, FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. This ASU will be effective for the Company beginning in its first quarter of fiscal year 2018 and early adoption is permitted. The Company is evaluating the timing of its adoption of this ASU. The Company does not expect this adoption to have a material impact on its financial statements.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

In September 2015, FASB issued ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard will be effective for us in the first quarter of our fiscal year 2017, although early adoption is permitted. The Company does not expect that the adoption of this ASU will have a significant impact on its consolidated financial statements.

In July 2015, FASB issued ASU 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and will be effective for us in the first quarter of our fiscal year 2017 with early adoption permitted. The Company does not believe the implementation of this standard will have a material impact on its consolidated financial statements.

In April 2015, FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs would not be affected by the amendment. ASU 2015-03 will be effective for us in the first quarter of our fiscal year 2017, with early adoption permitted. When adopted, ASU 2015-03 is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in August 2015, the FASB delayed the effective date by one year. For us the delayed effective date is for the first quarter of our fiscal year 2019. The deferral permits early adoption, but does not allow adoption any earlier than the original effective date of the standard. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently assessing the impact the adoption of ASU 2014-09, including possible transition alternatives, will have on its consolidated financial statements.

NOTE 2 - EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted-average number of shares of common stock outstanding. Diluted earnings per share reflects the potential dilution that could occur from common stock issuable through stock options and restricted stock units. For the three months ended November 30, 2015, there were 12,936 stock options excluded from the computation of earnings per share, compared with 12,936 stock options excluded from the computation of earnings per share for the three months ended November 30, 2014 because their effect would have been anti-dilutive. For the nine months ended November 30, 2015 and 2014, 12,936 and 12,936 stock options, respectively, were excluded from the computation of earnings per share because their effect would have been anti-dilutive. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.

NOTE 3 – INVENTORIES

Inventories consist of the following:

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NOTE 4 - PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

NOTE 5 - STOCKHOLDERS’ EQUITY

Cash Dividend

The Company paid a quarterly cash dividend of $0.12 per share of common stock on March 13, 2015 to stockholders of record on February 27, 2015. The Company paid a quarterly cash dividend of $0.12 per share of common stock on June 12, 2015 to stockholders of record on June 2, 2015. The Company paid a quarterly cash dividend of $0.12 per share of common stock on September 11, 2015 to stockholders of record on September 1, 2015. The Company declared a quarterly cash dividend of $0.12 per share of common stock on November 17, 2015 payable on December 11, 2015 to stockholders of record on November 27, 2015.

Future declaration of dividends will depend on, among other things, the Company's results of operations, capital requirements, financial condition and on such other factors as the Company's Board of Directors may in its discretion consider relevant and in the best long term interest of the Company’s stockholders.

Stock Repurchases

On July 15, 2014, the Company publicly announced a plan to repurchase up to $3.0 million of its common stock in the open market or in private transactions, whenever deemed appropriate by management. On January 13, 2015, the Company announced a plan to purchase up to an additional $2,058,000 of its common stock under the repurchase plan, and on May 21, 2015, the Company announced a further increase to the repurchase plan by authorizing the purchase of up to an additional $2,090,000 of its common stock under the repurchase plan. During the three months ended May 31, 2015, the Company repurchased 75,968 shares under the repurchase plan at an average price of $13.62 per share. During the three months ended August 31, 2015, the Company repurchased 145,329 shares under the repurchase plan at an average price of $12.75 per share. During the three months ended November 30, 2015, the Company repurchased 12,005 shares under the repurchase plan at an average price of $12.00 per share. As of November 30, 2015, approximately $989,704 remains available under the repurchase plan for further stock repurchases.

Stock-Based Compensation

At November 30, 2015, the Company had stock-based compensation plans for employees and non-employee directors that authorized the granting of stock awards, including stock options and restricted stock units.

The Company recognized $147,354 and $615,740 of stock-based compensation expense during the three and nine month periods ended November 30, 2015, respectively, compared to $166,843 and $700,526 during the three and nine month periods ended November 30, 2014, respectively. Compensation costs related to stock-based compensation are generally amortized over the vesting period of the stock awards.

The following table summarizes stock option activity during the nine months ended November 30, 2015 and 2014:

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes restricted stock unit activity during the nine months ended November 30, 2015 and 2014:

During the nine months ended November 30, 2015, the Company granted 4,000 fully vested, unrestricted shares of common stock to non-employee directors compared with the grant of 4,000 fully vested, unrestricted shares of common stock to non-employee directors in the nine months ended November 30, 2014. There were no unrestricted shares of common stock granted during the three month periods ended November 30, 2015 or 2014. In connection with these non-employee director stock grants, the Company recognized $61,040 and $47,480 of stock-based compensation expense during the nine-month periods ended November 30, 2015 and 2014, respectively.

During the three and nine month periods ended November 30, 2015, the Company recognized $147,353 and $307,846, respectively, of stock-based compensation expense related to non-vested, non-forfeited restricted stock unit grants. The restricted stock unit grants generally vest between 17% and 20% annually over a period of five to six years. During the nine month periods ended November 30, 2015 and 2014, 55,899 and 56,199 restricted stock units vested and were issued as common stock, respectively. Total unrecognized compensation expense of non-vested, non-forfeited restricted stock units granted as of November 30, 2015 was $2,011,819, which is expected to be recognized over the weighted-average period of 3.5 years.

The Company recognized $0 and $99,250 of U-Swirl stock-based compensation expense during the three and nine months ended November 30, 2015, respectively, compared with $0 and $152,518 recognized during the three and nine months ended November 30, 2014, respectively.

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NOTE 6 – SUPPLEMENTAL CASH FLOW INFORMATION

NOTE 7 - OPERATING SEGMENTS

The Company classifies its business interests into five reportable segments: Franchising, Manufacturing, Retail Stores, U-Swirl, Inc. and Other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to these consolidated financial statements and Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2015. The Company evaluates performance and allocates resources based on operating contribution, which excludes unallocated corporate general and administrative costs and income tax expense or benefit. The Company’s reportable segments are strategic businesses that utilize common merchandising, distribution and marketing functions, as well as common information systems and corporate administration. All inter-segment sales prices are market based. Each segment is managed separately because of the differences in required infrastructure and the difference in products and services:

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Revenue from one customer of the Company’s Manufacturing segment represented approximately $3.1 million, or 10.5 percent, of the Company’s revenues from external customers during the nine months ended November 30, 2015, compared to $2.9 million, or 9.6 percent of the Company’s revenues from external customers during the nine months ended November 30, 2014.

NOTE 8 – GOODWILL AND INTANGIBLE ASSETS

Intangible assets consist of the following:

Effective March 1, 2002, under Accounting Standards Codification Topic 350, all goodwill with indefinite lives is no longer subject to amortization. Accumulated amortization related to intangible assets not subject to amortization is a result of amortization expense related to indefinite life goodwill incurred prior to March 1, 2002.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Amortization expense related to intangible assets totaled $277,839 and $275,790 during the nine months ended November 30, 2015 and 2014, respectively.

At November 30, 2015, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following:

NOTE 9 – OTHER ACCRUED LIABILITIES

Other accrued expenses consisted of the following as of November 30, 2015 and February 28, 2015:

NOTE 10 – RELATED PARTY TRANSACTIONS

Our President and Chief Executive Officer has members of his immediate family with ownership interests in retail marketing businesses. These businesses have, on occasion, provided services to the Company and may provide services in the future. For the nine months ended November 30, 2015, the Company paid $68,130 and no amount was recorded to accounts payable that related to these businesses. Transactions with these businesses have been immaterial to our results of operations.

In July 2015, we entered into stock purchase agreements with each of (i) Franklin Crail, the Company’s Chief Executive Officer, President and Chairman of the Board, (ii) Bryan Merryman, the Company’s Chief Operating Officer, Chief Financial Officer, Treasurer and a director, and (iii) Edward Dudley, the Company’s Senior Vice President - Sales and Marketing, pursuant to which the Company purchased an aggregate of 54,500 shares of the Company’s common stock from Messrs. Crail, Merryman and Dudley (the “Stock Purchase Agreements”) at an average price of $12.60 per share. The price the Company paid for the shares was at a 3% discount to the closing price of the Company’s common stock on the transaction date.

NOTE 11 – RESTRUCTURING AND ACQUISITION RELATED CHARGES

In connection with the acquisitions of the assets of CherryBerry, Yogli Mogli and Fuzzy Peach in fiscal year 2014, the Company recorded net restructuring charges of $124,551 during the nine months ended November 30, 2014 associated with these acquisitions. These charges were primarily the result of professional fees for due diligence, valuation, audit and other activities in connection with these acquisitions.

On September 4, 2014, Ulderico Conte, Henry E. Cartwright and Terry A. Cartwright resigned as directors and officers of U-Swirl. Also on September 4, 2014, the U-Swirl Board of Directors appointed Bryan J. Merryman as the Chairman of the Board, replacing Franklin E. Crail. Mr. Merryman currently serves as the Chief Operating Officer and Chief Financial Officer of the Company.

In connection with these management changes, U-Swirl announced an operational restructuring designed to enhance U-Swirl’s operating efficiencies, improve its franchise support capabilities, and rationalize its cost structure. This restructuring resulted in expense associated with termination of certain employment agreements, severance payments for other employees and expense associated with the impairment of certain long-lived leasehold improvement, property and equipment. The Company recorded restructuring charges of $584,661 during the nine months ended November 30, 2014 associated with this operational restructuring.

ROCKY MOUNTAIN CHOCOLATE FACTORY, INC. AND SUBSIDIARIES

NOTES TO INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS

Total restructuring and acquisition charges incurred were comprised of the following for the nine months ended November 30, 2014:

The Company did not incur any restructuring charges during the nine months ended November 30, 2015.

NOTE 12 – SALE OR DISTRIBUTION OF ASSETS

During the nine months ended November 30, 2015, the Company sold one Company-owned Rocky Mountain Chocolate Factory location and financed the upgrade and reopening of a former franchised Rocky Mountain Chocolate Factory location. During the nine months ended November 30, 2014, the Company sold one Company-owned Rocky Mountain Chocolate Factory location and four U-Swirl Company–owned cafés. These locations were sold for a combination of cash and notes receivable. Associated with these asset disposal activities, the Company recorded the following in the nine months ended November 30, 2015 and 2014:

NOTE 13 – NOTE PAYABLE

The Company’s long-term debt is comprised of a promissory note, the proceeds of which were loaned to U-Swirl and used to finance U-Swirl’s business acquisitions (unpaid balance as of November 30, 2015, $5.4 million). As more fully described in Note 1, the Company and U-Swirl entered into the U-Swirl Loan Agreement pursuant to which U-Swirl could borrow up to $7.75 million from the Company to fund acquisitions . Pursuant to applicable accounting rules, the U-Swirl Loan Agreement is an intercompany balance and transaction that is eliminated in consolidation.

As of November 30, 2015 and February 28, 2015, notes payable consisted of the following:

The following table summarizes annual maturities of our notes payable as of November 30, 2015:

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NOTE 14 - CONTINGENCIES

In January 2014, U-Swirl entered into an Asset Purchase Agreement (the “CherryBerry Purchase Agreement”) with CherryBerry Enterprises LLC, CherryBerry Corporate LLC, CherryBerry LLC, and their respective owners (collectively, the CherryBerry Selling Parties”), pursuant to which U-Swirl acquired the franchise rights of frozen yogurt stores branded as “CherryBerry” (the “CherryBerry Acquisition”). As a part of the consideration for the CherryBerry Acquisition, U-Swirl agreed to issue an aggregate of 4,000,000 shares of U-Swirl common stock (the “CB Shares”) to the CherryBerry Selling Parties, which were subject to a one-year lock-up agreement. The CB Shares were issued to the CherryBerry Selling Parties in February 2015. Pursuant to the terms of the CherryBerry Purchase Agreement, following expiration of the lock-up period, if any of the CherryBerry Selling Parties desired to sell their CB Shares, they must first offer such shares to U-Swirl and RMCF prior to any sale of the CB Shares on the open market. If the proceeds from the sale of any of the CB Shares is less than $0.50 per share and the CherryBerry Selling Parties comply with other terms of the CherryBerry Purchase Agreement, U-Swirl agreed to pay a shortfall payment equal to the difference of the sale price of the CB Shares and $0.50 per share, multiplied by the number of shares sold by the CherryBerry Selling Parties. If U-Swirl was required to pay the shortfall payment at November 30, 2015, the shortfall payment would approximate $1,760,000. U-Swirl determined the likelihood of incurring the liability to be less than probable and has not recorded a contingent liability at November 30, 2015. In July and August 2015, the CherryBerry Selling Parties submitted to U-Swirl several requests for payment of approximately $205,000 of shortfall payments based on the sale of a portion of the CB Shares.

On August 25, 2015, U-Swirl filed a lawsuit against the CherryBerry Selling Parties, a former officer and director of U-Swirl and unknown other parties, in the District Court for La Plata County, Colorado, alleging wrongful actions on their part to cause the price of U-Swirl’s common stock to decline and thereafter making an improper demand for the shortfall payment described above, and certain other actions in violation of various provisions of the CherryBerry Purchase Agreement. U-Swirl seeks unspecified damages, attorneys’ fees, other costs, and a determination that the shortfall payment arrangement is void. On September 30, 2015, the CherryBerry Selling Parties filed an answer and counterclaim to the lawsuit in the U.S. District Court for the District of Colorado, and moved the lawsuit to federal court in the U.S. District Court for the District of Colorado. The counterclaim added RMCF to the lawsuit, and alleges that U-Swirl materially breached the CherryBerry Purchase Agreement by not paying the shortfall payment, that U-Swirl is the alter ego of RMCF and RMCF is liable for any obligations of U-Swirl, and that the U-Swirl Loan Agreement should be recharacterized as equity. The CherryBerry Selling Parties seek payment in full of the shortfall payment under the CherryBerry Purchase Agreement, declaratory judgements that U-Swirl is the alter ego of RMCF and the U-Swirl Loan Agreement should be recharacterized as equity, and interest, attorneys’ fees, costs and other equitable relief. The lawsuit is currently in the early stages of litigation. U-Swirl and RMCF intend to defend the counterclaim vigorously. It is not possible at this time to predict the outcome of this matter or reasonably estimate any potential loss.

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